On July 28, 2016, in Sandquist v. Lebo Automotive, Inc., the California Supreme Court (the “Court”) held that the underlying arbitration agreement, as interpreted under California contract principles, should determine whether a court or an arbitrator decides if class wide arbitration is available. The Court determined that there was no “universal rule” of who should decide the issue and that whether class arbitration is available is not a gateway issue that must be decided by a court. Therefore the Court evaluated the arbitration agreement under California contract law and determined that the contract “allocated” that decision to the arbitrator. Because such a result was consistent with presumptions under the Federal Arbitration Act (“FAA”) and was not inconsistent with United States Supreme Court precedent, the Court affirmed the decision of the California Court of Appeal which reversed the trial court’s dismissal of all class claims.
In Sandquist, defendant Lebo Automotive, Inc., doing business as John Elway’s Manhattan Beach Toyota (“Lebo Automotive”), hired plaintiff Timothy Sandquist (“Sandquist”) as a salesperson in 2000. On his first day of work, Sandquist claims he was given approximately 100 pages of preprinted forms and instructed to sign them “as quickly as possible,” without any discussion, as a condition of his employment. Among the forms he signed were three separate agreements containing arbitration provisions. He claims he did not review these agreements or realize he was signing arbitration agreements.
In 2012, Sandquist sued Lebo Automotive alleging racial discrimination, harassment, and retaliation. He also brought claims for discrimination and hostile work environment under the Fair Employment and Housing Act and unfair competition on behalf of “a class of current and former employees of color.” Lebo Automotive moved to compel individual arbitration under the arbitration provisions and the trial court granted the motion. The trial court further concluded that existing precedent required it to determine whether class arbitration was available. The trial court interpreted the agreements’ acknowledgement as impliedly prohibiting class arbitration and, therefore, struck the class allegations. The trial court provided counsel time to identify a new class representative because Sandquist’s claims were going to proceed to arbitration on an individual basis. Because all of the putative class members had signed agreements containing identical arbitration provisions, no substitute class representative could be identified and the court ultimately dismissed the class claims with prejudice. Sandquist appealed that decision. On appeal, the California Court of Appeal reversed in part and held that the question of the availability of class proceedings under an arbitration provision is a question of contract interpretation that the arbitrator must decide, not the court. The Court granted review and affirmed.
In analyzing whether a court or an arbitrator has the power to decide the availability of class arbitration, the Court relied on United States Supreme Court precedent to determine that the parties’ agreement is the “mandatory starting point” and that the agreement should be analyzed under ordinary state-law principles governing contract formation. Although Sandquist had signed three separate agreements, each agreement contained substantially similar language requiring “any claim, dispute and/or controversy . . . which would otherwise require or allow resort to any court,” except for a few specifically delineated exceptions, to be “submitted and determine[d] exclusively by binding arbitration….” The agreements specifically identified discrimination and harassment claims as well as any claims “arising from, related to, or having any relationship or connection whatsoever with my seeking employment with, employment by, or other association with the Company, whether based on tort, contract, statutory, or equitable law, or otherwise” as being subject to arbitration. The Court determined this language suggested that the arbitrator should decide the availability of class wide arbitration because: (1) it was a “dispute or controversy” between the parties that “might otherwise be permissibly submitted to the court;” (2) the potential class arbitration involved claims of discrimination and harassment which were specifically included in the definition of arbitrable disputes; and (3) other types of disputes were specifically excluded from the arbitration clause, discrimination and harassment were not.
The Court further determined that in the face of a contract ambiguity, well-established interpretive principles mandated that an arbitrator, not the court, should determine the availability of class claims. First, both state and federal law resolve any doubts as to the allocation of a matter between arbitration or the courts in favor of arbitration. Second, ambiguities should be construed against the drafter, and here, Lebo Automotive drafted the agreements, which were contracts of adhesion, and failed to unambiguously address who should decide the availability of class arbitration claims. In addition, the Court held that there is no established state law presumption that a court, as opposed to an arbitrator, should decide the issue. Consequently, the Court concluded that as a matter of state contract law, the arbitration provisions at issue granted the power to determine the availability of class arbitration to the arbitrator, not to the court.
Because all three of the agreements at issue invoked the coverage of the FAA, the Court also analyzed the issue under federal law to determine whether the FAA, as interpreted by the United States Supreme Court, imposed an interpretive presumption that preempted state law rules of contract interpretation and mandated a different result. Based on federal precedent, the Court determined that once the gateway question of whether an enforceable arbitration agreement applies to the claim at issue is resolved, there is a presumption that that the arbitrator shall have the power to decide procedural questions arising from the dispute. Because the question of whether an agreement prohibits class arbitration is a procedural question relating to the type of arbitration proceedings agreed upon by the parties, the question involved contract interpretation, which should be addressed by the arbitrator. The Court found that this conclusion was further supported by two well-established FAA principles: (1) an arbitration agreement is motivated by the desire for expeditious results; and (2) uncertainties regarding the scope of arbitrable issues should be resolved in favor of arbitration.
The dissent challenged the notion that the availability of class arbitration claims is a procedural issue rather than a gateway issue - which should be addressed by a court - under the FAA. While acknowledging that the United States Supreme Court has not specifically held that classwide arbitrability is a gateway issue, the dissent contended that the United States Supreme Court has given every indication that such is the case. The dissent further bolstered its conclusion that this is a gateway issue by citing to other federal appellate court decisions holding that courts, not arbitrators, should decide whether an arbitration agreement permits class arbitration. Nevertheless, the California Supreme Court distinguished those opinions and took the opposite view under these circumstances.
In conclusion, if your business utilizes arbitration provisions containing class arbitration waivers it should consider: (1) evaluating and revising those provisions to be sure that they remain clear and unambiguous under existing state laws in all jurisdictions where claims may be brought; (2) clarifying in the arbitration agreement who should have the power to decide whether class arbitration is available, a court or an arbitrator; (3) clarifying who should decide other procedural questions, a court or an arbitrator, by making any such preferences clear in the arbitration agreement; and (4) revising your agreement to include an express class action and class arbitration waiver provision which is designed to pass the scrutiny of either an arbitrator or a court in any jurisdiction. Also, if your arbitration agreement incorporates the rules of an organization that administers arbitration services (e.g., AAA or JAMS), you should be aware of the organization’s default rules related to agreement interpretation and procedure and ensure that the express terms of your arbitration agreement clearly reflect any intent to apply alternative rules.